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Tuesday, May 26, 2015

I Wouldn't Call That Reassuring

I saw a perky headline about April's durable goods release. It didn't quite match the reality.

There are signs of a more structural slowdown in April's report. YoY, shipments are up and new orders are down. Total +3.5%/-1.3%. And so it goes, with autos being about the best category. 

If this continues - which it may well not - we are in for a much slower economy the rest of this year than the Fed expects. You can make a case that the oil slowdown accounts for a lot of this, but it doesn't matter - if it persists, things will be difficult this fall. YoY YTD capital goods new orders are down 5.9% (-5.9%).

On the other hand, it might be that this clears out in May/June, and we pick up some impetus. 

So far rail has not shown improvement - we have gone slightly negative on the YoY YTD in the last rail report, and we will have to wait two more weeks to see if that is real or will redress after the difference in the Memorial Day calendar works its way out of the figures. The weakness is in carloads, which generally does precede the decline in intermodal.

So far this year the economic data is stunningly equivocal, which makes me think that we'll stagger through with the help of construction. But in a month or two I may revise my thinking if there are no signs of life elsewhere. 

The KC manufacturing index for May was frankly disturbing. 

Tuesday, May 19, 2015

But Winter Must End!!!

Okay, not in Ice Ages, but currently we are in one of the balmy interludes, although I can concede that Bostonians may have wondered about that earlier this year.

New Residential Construction takes a really strong pop in April. Very nice. Very strong. In both permits and starts.

The economy may not be that strong, but it is getting its legs under it.   

Friday, May 15, 2015

The Real World Effect Of That Big Flaming Ball Of Gas In The Sky

Secondary to my previous post, here's the joy of it all.

Industrial production was released today. Here's the result:

IP has been working down a bit for months. The blue line is the index, the red line is the YoY. The green line is real retail YoY. We're not QUITE in a recession yet, and hopefully we won't get there, but the reason we are not was the giveback on the gas. That gave consumers enough back to get them through another bad winter with more margin. But we are right on the line. I expect IP to rebound slightly in May - the latest report is

Rail confirms this but may be giving my May rebound theory the raspberry:
 For the first 18 weeks of 2015, U.S. railroads reported cumulative volume of 5,043,559 carloads, down 1.8 percent from the same point last year; and 4,679,513 intermodal units, up 1.7 percent from last year. Total combined U.S. traffic for the first 18 weeks of 2015 was 9,723,072 carloads and intermodal units, a decrease of 0.1 percent compared to last year.
Here's the graph - we've been weakening recently:

That blue line is just failing to green shoot, and this goes through May 9th. Rail was hard to read this year, because of course the port strike slowed things, and then there was a rebound, so one had to just sit and wait for all of that to work itself out of the system to confirm a trend.

Now, I still believe there is the economic space to get out of this without recession. Nor am I surprised, because honestly the direction of CMI does show tightness. But it is not the time to be loading the economy down with ANY more regulatory mandates, and ACA changes have truly had a very adverse effect on many families. Consumer Units. 

This is all quite dire for China, which usually gets a May uplift from the US retail cycle, and may not get that much of one this year. China's economy looks really weak.

A close-up on that mug shot:
The red, graphed on the right scale, is IP YoY. The green real retail YoY.

I was trying to find the reason for the real stresses seen in NACM CMI, and one of the things I came up with is the sharply increased electricity costs for some regions, combined with a bad winter.

In any case, if we want to scrape through this "soft" patch, we are going to have to do it ourselves. The only government policy that is helping at all this year is the drop in FHA premiums.

Thursday, May 14, 2015

Speaking of the Economic Weather Report

There is no question that bad winters are not helping the US economy. Admittedly, there are other problems, such as public debt at the state and local level. You simply cannot integrate a model with growing economies, constrained household incomes, and an ever-growing state and local tax burden. Something's got to give, and it is going to be real growth. 

But as a sideline, and perhaps a gentle hint not to buy farmland too far north, I thought I'd look at a little bit of the climate data. I have remained a spectator in the carbon wars, watching with increasing fascination as the real world situation ameliorated and the human angst-o-sphere heated up to compensate. Now that we have the Pope piling in, I suspect that has reached its natural peak, unless the Chief Rabbi is waiting in the wings. 

In the real world, colder northern winter temps will have an effect, and the angst-o-sphere will not compensate.

First, from the really excellent site WoodForTrees.org, a look at what happened when China dumped a massive amount of carbon into the atmosphere:

We have here the RSS lower troposphere temp data series. The benefit is that it is very, very accurate. The downside is that it is of short duration, though lengthening every year. We have a few trend lines - since 1998 it's obvious that it has been getting colder. Since 1995 (nearly 20 years!) the trend line is about flat, which surely means something.

We also have the monthly sunspots on a 20 year average, which I long ago figured out was the best predictor represented this way. (Note that this program charts means at the center point, so that is why the curve is shifted left on the graph.) And then we have the sharp upward trend of Mauna Loa CO2. One suspects that is not controlling global temperatures much. 

It is evident that something changed in the late 1990s. The CO2 keeps going up and up, but it isn't driving temps up. There is a suspicious hint that solar activity is. That trend shifts, and lo and behold, so does the troposphere trend.

Yes, yes, I have read all that stuff about the heat hiding in the oceans. Really? One day the heat just looked up into the sky and screamed "OMG - Where are the sunspots?",and the heat dove deep into the ocean to hide from the implacable, frowning face of its solar master like Godzilla when the Japanese planes get too close? Nah. Not even a plausible fairy tale.

Solar activity does vary a lot over time, and it does seem to correlate with temps as observed, although it's well to note that in the past land temperature measurements were biased toward the northern hemisphere (and they still are today) and that they will be a lot less accurate than satellite data. So mentally stick in some large error bars:
Here we have HADCRUT3, which is a much longer running temp series, with AMO (the northern oscillation) and sunspots. Normalized and 10 year means. I'm not trying to pull tricks here.

As you can see, the historical record is that solar activity does vary a lot over time. There has seemed to be a correlation with climate. I added AMO, because I suspect part of the northern climate transition is driven by AMO, and that solar activity drives AMO

Note that I don't claim that CO2 has no effect on temperatures - I suspect that it does, but only a very weak one, and in part that effect is offset by changes in the distribution of water vapor in the atmosphere (a negative feedback rather than the theorized positive feedback).

I also suspect that the jagged AMO ridges when AMO is in transition are correlated with US dustbowls, which makes me a bit nervous.

This is pretty much the same thing, but I added in PDO (Pacific oscillation). Why? Just in case you wanted it. I think the ocean current shifts distribute the heat, but I think they may be largely influenced by solar shifts.

A look at my theorized system during the time frame that we have concurrent data:
I think AMO loops within its own bounds, which is a natural regulator of solar changes. But the point is that AMO does seem to influence northern weather, which has several implications. For one, steeper roofs in Boston would be wise. For another, this cycle has only just begun, so I wouldn't expect these last winters to be flukes. I would expect the coming US northern climate to be far more akin to that of the tales told by my parents and grandparents when I was young. Winters used to be colder, they would say, and you know, they were right.

Last, a look at the above with a five year mean, just so you know I am not cheating:

One of the interesting things lost in the angst-o-sphere has been the remarkable similarity in the temperature sequence between the 1900-1940 shift and the late 1970s-2000 shift. I have a LOT of trouble accepting CO2 as a strong driver, especially since these shifts are, historically speaking, piddling. Picayune. Petty. Pipsqueaks:



I crack up when I read or hear stuff about how the melting Arctic is going to hand us Tatooine. Been there, done that. If in the climactic optimum the methane didn't fry us, it is not going to fry us now. 

The Hans Tausen Iskappe in Greenland completely melted during the climactic optimum. It has formed since it started getting colder.

What we have to worry about in the near term are northern climate conditions that may be a little harsh, and will have an effect over the longer term on economic growth.

Wednesday, May 13, 2015

It's All About The Chickens Now

No, really, it is all about the chickens, aka bird flu. If it jumps to pigs, we're done. As it is, it's hard to see how poultry prices won't rise for the consumer, which is going to have a depressing effect August through the end of the year.

CA drought not helping either.

The headlines on the April retail report are rather dour, but the real picture is skewed by the Easter timing.  The March report indeed was revised up, but that makes April look worse, because sales that are usually in April show up in March. These reports aren't adjusted for prices, and I think there is considerable strong-dollar effect in weaker prices, so the real picture is probably considerably better.

The actual report does show some weakness both YoY and in the rolling three-month SA. It's better to use the three-month totals in cases like this. Currently the Feb-Apr YoY is +1.5%, ex autos +0.4%. So that is not good. From the prior three months (Nov-Jan) it's -0.6%, ex autos -0.7%. But it's not like April sales just suddenly flat-lined. 

Retail is weak, and very dependent on autos which are credit-related. 

Groceries are a bit worrisome. That's what I am watching. However restaurants are doing well, which slightly offsets it. Wages are rising more slowly than expenditures on food, which, to be blunt, is never a good sign. Wages are left in the dust by costs for medicine, for example, which somewhat depresses other categories. 

So we still have a price-sensitive consumer with wary spending behaviors on anything not paid for out of credit. 

NFIB's Small Business report was somewhat encouraging yesterday. It rose after the decisive March fall; capital outlays looked encouraging and hiring looked encouraging. Sales are declining only slightly and earnings are up. Prices are constrained by reality. There is no inflationary pressure evident in the NFIB report except for wages/compensation. There is pressure there. In order to get decent employees increases are necessary (this comes through strongly), but the pricing power isn't there to compensate that well for it. 

This month's survey is one of the large-sample months, so it is more reliable. There is no sign that we are losing momentum in it - just that epic expansion is not to be expected. But that is more normal than not.

Atlanta Fed Business Inflation Expectations agree well with NFIB's employment comp crunch -  expected inflation is up to 1.9%, which would be encouraging if you are a Fed Head looking to raise rates. Two-thirds of polled firms are facing higher compensation costs, and the vast majority intend to raise prices to compensate. '

So who wins? If the chickens cooperate, inflation running about 2.3% over the course of the year. If the chickens don't cooperate, the ability to raise prices to consumers isn't there, and the strong dollar constrains export rises, so ...

Businesses are not behaving as if they expect real problems, and some of the inventory builds are just buying cheaply while they can. So I rate it continued expansion for six months.

Now those consumers!!! Those consumers may have to work a little harder, but the dollar shock should be over, the oil crunch should bottom out late second quarter or early third, and so as long as we keep buying motor vehicles, all should be well. 

I do not have a clue as to whether the motor vehicle sales will  hold up. Not a clue. I could argue it either way. The current suggestion is that the overall growth trajectory is slightly lower going into the third quarter, with second quarter being of course lifted by seasonal effects. 

I would be sure we were out of the woods, except that the fourth month freight total isn't looking too fine, and rail has shown a very slight weakening in the last month, which is not what I expected. So I am still where I landed last October - the drop in fuel prices should have enough oomph to carry us over a naturally structurally soft patch. 

And the threat to that is chickens, seriously. Nothing changes consumer behavior like difficulty covering the very basic expenses. 

ACA and higher medical deductibles do show up in economic figures. Consumers facing higher medical costs are slow the first half of the year.

Friday, May 08, 2015

Quickie Update

Altogether this seems improved. The employment report is good, with substantial agreement between the household survey and the establishment survey, which surely should seem to reinforce the good news. Household comes in at +192K this onh. The establishment survey for March was revised down, so it is now closer to the household number, although still higher. 

The two month household is 236 thousand. The monthly average for establishment is much higher, so I expect downward establishment revisions later. But still, not bad. 

CMI for April was released with very substantial upward revisions for Feb/March. It is still on a declining pattern but now out of the into-the-wall version we saw last month. It is weaker YoY, but VERY IMPORTANTLY, now shows an uptick in credit granted for April.

The economy is weak and we won't see a great second quarter, but it's not flatlining. 

The major weakness in the economy can be seen in the establishment survey, giving average hourly wages YoY having increased by 53 cents an hour. Doesn't buy you much! So there's tightness on the consumption end. However the employee-population ratio increased from 58.9 to 59.3 over the year, although it has been static for the last few months.

I see further ominous Drudge headlines about all the people not working. Well, we are going to see the retirees in our overall numbers, because all the people born through 1950 are either 65 or going to turn 65 this year. They are going to retire sooner or later. Get used to it. The household survey shows that the number of people working grew by 2.8 million YoY. That's not bad.

So far this quarter, rail is sticking to its pancake flat YoY pattern.  But the economy could be picking up steam (and probably is) relative to the first quarter - we're just not going to turn in a nice large growth quarter in Q2 2015, whereas we did in 2014.

GDP in Q1 was mildly negative, which will show up later in revisions. So far it looks like this quarter will be mildly positive. Motor vehicle sales were a touch disappointing in April. 

So right now, most the reports are pretty consistent with Employment - manufacturing slow or flat, services somewhat better, construction disappointing, and all things waiting on autos. As long as autos hold up ...

The establishment survey is forecasting better construction numbers coming up due to a hefty increase in employment. 32K of the 48K shown is in the Birth/Death adjustment, which doesn't mean that it didn't happen. Still, construction employment increased which is a good sign for May.

I think May will be better on most fronts. CMI is showing weakness, but not gathering storm clouds. A cautionary note is sounded by wholesale inventory/sales ratios, but while the overall number looks worrisome, when one digs into the details it's less disturbing because a decent amount of the seeming overage is in petroleum.I am a little concerned about grocery sales in this report - that's the line I am watching. They shouldn't have been that low in March. Maybe it will be revised up. 

I expect fracking work to start picking up this summer. That should help us. 

Autos - eh, I don't know. They are beginning to look a little topped out, but maybe we'll get our second wind this summer. Construction always generates truck sales, and there is probably some incentive room.


Wednesday, April 29, 2015

Fed Day GDP

Well, we know the statement will be full of reassuring noises and plenty of wiggle room. 

Advance GDP for the first quarter is in at +0.2. That's annualized. Current dollar GDP is +0.1, annualized. 

This is exactly what rail traffic implied, so I am not surprised. But the details are somewhat unpleasant - Gross Private Domestic Investment was quite weak at 14 billion. Excluding inventory builds (+30.3 & the new category of research and development (+8.3), it would have been quite negative. The inventory build isn't a surprise, but it implies future weakness to some extent. The question is, how long can oil stocks build?

The increase in PCE was less than half of that of the fourth quarter, but of course we can't continue to spend at that rate. 

Exports declined, but that was expected as a strong dollar effect. 

It was a bad winter for most of the country, and there is a natural bounceback. Usually. The problem is that we probably have a net weakening of the ability to consume in the private sector, as the lower fuel cost surge has somewhat run off, but natural changes to consumption patterns from high basic costs and medical insured-but-not-covered costs remain. 

Therefore, growth this year remains strongly dependent on credit-heavy sectors such as autos and homes. 

Later this week we will get the next CMI (B2B credit), and I am hoping for that to take a turn up. Right now, the current and future indicators are still, to use an elegant economic intellectual term, piss-poor. If you are wondering, at least that's a notch above the term of art "Stock up on Imodium" most commonly associated with recessions.

The increase in capital gains taxes really was not a good idea for a weak economy. One expects a natural slowing in investment, and we are certainly getting it.

So far freight hasn't shown a spring surge. Truck tonnage for March recouped somewhat from a dire February but stayed below peak. Rail continues quite flat.

Shale oil has been a big uplift for the US for years, and with that impetus gone from the economy, we are down to cars and houses. The strong dollar does, of course, tend to weaken manufacturing.

The consumer confidence report yesterday was rather poor. It fell more than 6 points in one month, and the weakness was centered on the job market. That should not really be surprising after CMI, because that much weakness implies a pull-back by businesses extending until they recoup their finances.

My reading on housing is that it's not that bad, so I still have some hope. April readings on retail haven't been good. Rail says we are not seeing any surge of hope and change. Consumer confidence is flashing a warning signal. I will have to wait a while to see if my bullshit theory on retail was true.

The natural term for CMI is two months, so if the low was March, then we could hope for a pick up in June. April will not be a good month.

Monday, April 20, 2015

CFNAI; Rail

This really is not a surprise. CFNAI was released for March.
Due to the generalized dolor indicated by CMI's B2B credit, we knew this was going to be poor. 

Note the downward revisions to January and February (somewhat related to employment revisions), and the sad YoY contrast with March of last year. The three-month moving average looks better in contrast to March of last year, because it evens out the moves.

But CMI does not forecast a good April, nor has rail shown much sign of economic green shoot-bearing potential yet for April.On a YoY basis, rail has been flat so far this year, implying an abrupt pull-back in growth compared to Q4. This is a little concerning, because remember GDP for Q1 2014 was distinctly bad.

The difference between last year and this year is that moving into Q2, we appear to be seeing growing weakness.

The current peak for this cycle is November 2014. If we arrive in June without seeing a distinct move up, the probability that we are in recession will be very high.

Wednesday, April 15, 2015

Industrial Production

Not a good report The weakness is not so much in March's headline, which is -.6. It's in the quarter, with a downward revision to January:
For the first quarter of 2015 as a whole, industrial production declined at an annual rate of 1.0 percent, the first quarterly decrease since the second quarter of 2009. The decline last quarter resulted from a drop in oil and gas well drilling and servicing of more than 60 percent at an annual rate and from a decrease in manufacturing production of 1.2 percent. In March, manufacturing output moved up 0.1 percent for its first monthly gain since November; however, factory output in January is now estimated to have fallen 0.6 percent, about twice the size of the previously reported decline.
 Oil and freight doesn't come up recessionary, but the concern here is that this feels more like 2006. The YoY is still +2%.The high for industrial production was in November, and when these figures are updated on the graph the decline will look worse.

Empire State rolled negative, still with great expectations. The last Dallas survey lapsed into the negatives, but that was expected due to the oil slowdown. In March, the Dallas general business activity index clocked in at -17.4. Richmond (March 24th) was negative as well, and decidedly so, if more modestly so than Dallas. Kansas has been quietly but steadily walking down, and turned negative in March as well.

We're getting to the point at which this should start showing up more in jobs.

While not brilliant, housing has been looking decent. Housing starts comes up tomorrow. 

Until the diffusion shows up in freight, it's not a recession. So I guess we wait for April trucking and May rail - two more months.

China's economy looks awful to me. I doubt we are going to be providing them any help, and I don't think they are going to be providing us any. China reported GDP steady at 7% for the first quarter, and while I might agree with that if I were held at gunpoint, I'd have to be sure that the gun was loaded.

The components look sick:


This I believe:

Because of this:

 
If you read the link above thoroughly, I think you'll goggle at the "steady growth" theory. too. 

Tuesday, April 14, 2015

Pretty Much A Sweep

Now this gets interesting. April is not looking that good.

Today we got NFIB for March, which showed a remarkably synchronized drop very similar to CMI's B2B credit survey for March.  There was a sharp change in inventory plans. Taken as a whole, the report is not forecasting recession, just low growth. Credit is still not a problem, but reported interest rates are up although still low by normal terms.

Note that the favorable employment gains last year were largely reflected in NFIB, so I will be watching this report carefully. Still, in general most categories are more favorable than they have been YoY..It's just that the trajectory shifted downward in March in a most unambiguous and determined way. CMI slid in February, but I didn't worry too much because NFIB was holding up. When I see both move down together, it assumes a whole lot of significance for the general economy.

I would have to be raving lunatic not to concede that economic trajectories are mostly resting on consumer spending over the next few months. So this brings us to the retail report.

Retail is not all that hot. Autos are still good, but Easter was early this year and March retail sales should have been better as a result. They weren't. In particular, grocery sales are troublingly low, and it does not seem to be because of price drops. But this report is not recessionary either - it merely forecasts weakness and a cautious consumer environment. The hallmark of recession in this report comes when discretionary categories suddenly drop. They haven't, in part because consumers are spending a lot less money on gas. But the trajectory for retail seems to be weakening.

Inventories are a month behind, so this report is for February. But it shows that while heavy inventories did not worsen, it appears that everyone has stocked up already. So one would not expect a growth pulse here through April. 

I would not bet against Treasuries. Only time will tell what spring will bring, but the March retail report implies a generalized weakness.

The retail report is worrying me. The headlines you will read on this are all wrong. March, looked at individually, looks like an improvement. But it is not - if you look at March YoY against three-month YoY, we're still weakening. 

Because I really don't like the March retail report, and because there is a really high month-to-month error ratio on retail sales, I am going to take the firm position that March retail is JUST WRONG, that the uptick in sales occurred late, and that March retail will be revised higher next month. Please note that there is no internal evidence whatsoever for my theory that the uptick occurred late in the month. NONE. Zip. Nada. I have about as much evidence for this as I do for the theory that space aliens are going to come by and drop buckets of cash on us. It's possible that my theory is true, and I would like for it to be true. I would not place much personal reliance on this M_O_M theory. I am not really a depressive person, and I tend not to see the worst aspects of things. 

If I am wrong, we only have a few months to turn this around. In further support of the theory that I am wrong about March, I have been following lines of rather recessionary advertising trends for lower end retail.

The 2014 winter was bad also, but one saw the uptick in March. This year it looks like the economy shifted into low gear in March. Also, there will be some drag on the economy through the summer from the CA drought.

Autos and housing are holding up. They rely on credit, and when people don't have money to spend but do have steady income, credit often does hold up the economy. 

As for prospects of any significant Fed moves up before fall, can one really believe that the Fed will kick out the economic props this summer????  This defies all logic.

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